Saturday, December 27, 2008

Bah! Humbug!

I hope everyone had a wonderful holiday! Just a quick note today.

It appears the holiday retail season was a complete bust(what a surprise). Some of the early numbers are starting to come out:

Quick Take:

It appears that big ticket items were practically ignored this year as the consumer continued to pull back. This shouldn't be a surprise given the credit situation in this country.

Speaking of credit, I am starting to ask myself something: Is there such a thing as "credit" in this country right now? I am starting to wonder! Ask any automaker their thoughts on this and they will respond with a resounding NO!

It appears we have just ended our 25 year spending binge folks.

The numbers tell you that our country now finally realizes its time to pay the piper. Expect the consumer to concentrate on paying off debt and hoarding cash in 2009 versus spending it. This is a frightening scenario considering that 70% of our economy is consumer driven.

This will do nothing but accelerate the massive deflation that we are now witnessing.

Isn't it amazing how quickly things have changed in a span of less than a year?

Everyone feared inflation and another lost decade like the 70's when oil spiked up to $147 earlier this year.

Today, we sit here with oil under $40 a barrel as the Fed attempts to prevent a lost decade from a deflationary debt spiral similiar to Japan in the 1990's by flooding the system with credit.

Hello Washington! Its not going to work! The consumer can no longer afford to borrow anymore! We have enough debt for now! Thanks anyway!

The numbers say it all folks, and the early signs as seen above tell you that deflation is clearly defeating the Fed's attempt to re inflate.

The sad conclusion that I am slowly coming to is that either scenario(inflation/deflation) is going to result in a lost decade or more for our countries economy.

Deflation will rule in 2009 in my opinion. However, down the road, inflation will rear its ugly head which will then trigger another downturn in the economy.

More on that later.

Tuesday, December 23, 2008

A Little Holiday Cheer From Dr. Doom

Good Afternoon Everyone!

First of all:

Happy Holidays! Please travel safe if you are on the road today.

I thought everyone would enjoy listening to a little Dr. Doom on Christmas Eve. Take a seat in front of the fire and listen to some gloom and doom from Marc. The fire includes a few Christmas tunes if you are looking to get into the Christmas spirit.

Marc Faber has been one of the few economists that has been right during this downturn. His thoughts on 2009 are once again bearish but interesting.

I will be out of town over the next few days to spend the holidays with my family. I should be back over the weekend.

Enjoy Dr. Doom!

The Housing Collapse Continues!

Good Evening Folks!

I gotta admit: Sometimes its hard to write this blog everyday as I watch our economy implode. The news just keeps getting worse folks. Stocks fell another 1% today as worries around the economy continue to intensify.

The main culprit for the drop was the absolutely horrific housing numbers that were released today. Median resale prices in November dropped 13% which was most likely the largest drop since The Great Depression.

"Dec. 23 (Bloomberg) -- Sales of single-family houses in the U.S. dropped in November by the most in two decades and resale prices collapsed at a pace reminiscent of the Great Depression, dashing speculation the market was close to a bottom.

Purchases of both new and existing houses dropped 7.6 percent from the prior month, the biggest decline since January 1989, to an annual rate of 4.43 million, government and industry figures showed today. A 13 percent drop in the median resale price from a year earlier was the most since records began in 1968 and was likely the largest since the 1930s, the National Association of Realtors said.

“Housing is still in a freefall,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts.

The figures were worse than economists had forecast and signal that the battered housing market that led the economy into a recession may be taking another lurch down. Sliding property values mean more Americans will be under water on their mortgages, destroying household wealth and undermining consumers’ purchasing power.

The average rate on a 30-year fixed-rate loan fell to 5.18 percent in the week ended Dec. 12, the lowest in more than five years, according to the Mortgage Bankers Association.
Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., New Jersey’s biggest homebuilder, called on the government to provide an economic stimulus for the housing industry.

“If government wants to get to the root of the problem they need to fix housing first,” Hovnanian said in a conference call on Dec. 17. Hovnanian, whose company reported a fiscal fourth quarter loss, didn’t specify what type of government intervention he wants in the housing market."

My Take:

What can I say, I'm speechless. This number was way worse than anticipated. Housing prices in every region of the country fell significantly. I have often said on here that our economy hinges on housing prices. The second section of this article that I highlighted says it all as to why the consumer is in such trouble. We have lost a lot of our ability to consume.

Falling housing prices also exacerbate Wall St's problems because their balance sheets are filled with bloated over priced McMansions.

Rates have dropped dramatically and yet its done nothing to stimulate housing demand. Refi's have increased but the demand for new or exisiting housing has vanished.

What really pisses me off is that the government continues to try and fix the problem by constantly attempting to prop up housing prices by pouring liquidity into the banks in an attempt to re inflate the housing bubble with more cheap money and low interest rates. When are they going to realize that this isn't going to work?

In my eyes, prices must fall dramatically before anyone goes near a house. Confidence has been totally destroyed. Americans see nothing but corruption and a constant changing of the rules in the housing market. They no longer TRUST the system. They don't even understand it. I constantly have friends and family coming to me totally confused by whats going, and asking me if they should refinance since rates have dropped into the 4's. All of this confusion has done nothing but paralyze the consumer. No one wants to make a mistake or get "screwed" by a greedy lender. Trust is gone. Once this happens its over folks.

In my eyes, its gotten to the point where no one wants anything to do with a loan or a bank until TRANSPARENCY comes back into the financial system. They won't come back until they have faith that they aren't getting screwed and they understand what they are getting into. I think the Fed lost the public when the loan modifications and quantitative easing started. Its simply got too complicated to buy a house now. This is the biggest purchase anyone will ever make in their lifetime. Its a 30 year commitment. How can you ask them to buy when Wall St has totally GAMED the system???

I feel like screaming "Stop the Insanity!" like that women from the 1990's who did the exercise infomercials.

So what ends up happening when housing prices continue to free fall as the confused buyer attempts to understand whats going on in the housing market?


This is how deflation spirals are created folks. Deflation scares the living daylights out of the Fed: It creates a death spiral where no one buys and prices continue to drop. As prices continue to drop, the buyers continue to stay on the sidelines waiting for even more drops. Its a viscous circle. The pros call this is called a negative feedback loop, and its a hard loop to stop once it gets started!

This is why you saw the Fed use every trick in the book last week in an attempt to stop this deflation.

In my opinion, there is no way that the Fed can stop housing from completely imploding at this point. They need to drop the playbook, step to the sidelines, and let free market capitalism take its course. If this destroys the banks that did the bad loans than so be it. We can always create new banks that have healthy balance sheets will actually allow them to lend!

Bottom Line:

Enough is enough Mr Bernanke: Its time to walk away and let nature run its course. If you don't start to walk, your homeowners will.

20% of current home loans are already underwater and you are playing a dangerous game of chicken. What are you going to do if they decide to walk as you continue to modify loans and change the rules? Stop providing liquidity to a bunch of banks who won't lend. Stop wasting our taxpayer money. You have thrown $8 trillion at this problem and prices continue to plummet!

Save whats left of your balance sheet for the depression that we are about to head into as a result of your bailouts.


I have been trying to go long on a few names thinking we might see a Santa Clause rally over the holidays. Each day I refuse to pull the trigger as the news continues to worsen. I am still short FAZ, SRS, and BEARX. I saw no reason to take any of them off going into the close.

There is absolutely no enthusiasm on the long side folks. Buyers continue to sit on their hands. How can anyone buy after reading these type of headlines everyday? I refuse to try and front run the long side with some longs because i really believe the bottom could completely fall out of this market at any time.

2009 is going to be a long chaotic year.

Save your pennies. You will need them.

Monday, December 22, 2008

Commercial Loans: The Next Potential Bailout?

Good Evening Folks!

Well, a lot of news hit the wires today in the commercial area. Since we like discussing SRS, I thought I would focus on the commercial area today. It looks like a commercial bailout is on the way folks. I don't think the banks can afford a huge commercial hit right now, and it will be interesting to see how Wall St trades commercial in the oncoming weeks.

Many bond traders have been saying for weeks that the best trading strategy is to attempt and front run the Fed before they arrive with their deep pockets. This is why you saw a buying binge of MBS's by Pimco and others in the last month when the Fed hinted they may be a buyer of these assets.

A similiar game is played by traders in the equity markets with the bailouts. Once one bailout gets done, the first question traders then ask themselves is whose next? Now that the automotive deal is done, commercial is the next area to focus on in my opinion. Things are a disaster in the commercial lending area. Take a look at this graph I picked up today on commercial lending:

Here is some more commoercial research from Deutsche Bank. I want to thank John for sharing this in the comments section. This is an excellent research report by Deutsche.

I advise everyone to read this. It is extensive and very informative. As you can see by the graph above, lenders are literally running away from commercial refi's this year. If you were a bank why wouldn't you? Commercial rents will be dropping like a rock as the consumer dies.

I want to repeat the details of a conversation I had with a friend who was involved in securitizing commercial CDO's before the market blew up in '06.

He told me the lending standards used on commercial loans were terrible. He should know because he was the guy that was involved in pooling the loans together to form the commercial securitizations!

I asked him: "what was wrong with the lending?"

He explained to me that the REITS were allowed to lend money on the basis that rents would rise 5% a year. This allowed them to borrow much larger sums of money. He told me this was a recipe for disaster. He also explained that banks are usually very tough when it comes lending to the commercial side. Commercial lending is usually extremely conservative, and usually involves down payments of 30%. I guess the banks decided to look the other way this time as they dropped money out of helicopters.

These REIT's are now screwed because rents have stopped rising. In fact, they are actually falling as the consumer continues to pull back on dining out and shopping. On top of that, vacancies are about to soar due to BK's following the Christmas season as the recession deepens. This is a nightmare combo folks! Its obvious that many of the commercial REITS are no longer generating enough revenue to pay back the loans that were done based on lending standards that assumed the glory days would rock on and rents would continue to rise. Leverage strikes again! Its great on the way up but it sure sucks on the way down!

Bloomberg had an interesting article today on commercial:

Bloomberg reported that commercial drfaults could triple if rents drop 5%:

"Dec. 22 (Bloomberg) -- U.S. commercial properties at risk of default could triple if rental income from office, retail and apartment buildings drops by even 5 percent, a likely possibility given the recession, according to research by New York-based real estate analysts at Reis Inc.

Lenders that used optimistic rent estimates to grant mortgages beginning in 2005 stand to lose as much as $23.1 billion, or 7.02 percent, of total unpaid balances if landlords lose 5 percent of net operating income, according to Reis. Analysts examined data on 22,890 properties that together may account for unpaid loans of about $329 billion in 2009, said Victor Calanog, director of research.

Banks are at risk as office vacancies are forecast to rise to 15.6 percent next year from an estimated 14.6 percent at the end of 2008. Lenders who sold commercial mortgage-backed securities to pension funds, investment banks and foreign governments have been hit by more than $1 trillion in losses and asset writedowns connected to bad residential loans. "

Quick Take:

Ha! They will be lucky if rents only drop 5%. I also think the vacancy expectations in this article are a pipedream.

Bottom Line:

So the question becomes how do you trade commercial if a bailout looks likely? The Fed has already hinted that they may throw a lifeline to the commercial area. The banks want nothing to do with commercial, and companies like GGP are about to go under. Something needs to be done or commercial is going to blow up! This could be a potential death blow to the banks, and it would force the Treasury to cough up more money from the TARP in the form of capital injections to the banks in order to keep them solvent.

My guess is many of these REITS are about to explode. I don't think the Fed has no desire to see hundreds of malls get liquidated when no one wants to buy these bloated assets unless they are priced at pennies on the dollar. Circuit City is a prime example. They put together an auction in order to selloff the 150 stores that they are closing down as they reorganize. CC ended up cancelling the auction due to a lack of bidders. Can you imagine how tall the weeds are in those parking lots by now?

The banks will take massive losses if they are forced to sell such large assets in this economy.

Add all of this up and it spells TARP BAILOUT if you ask me folks. We all know the Fed doesn't know how to say no!

IMO you can trade this two ways. If you have a brass set of balls, you can jump in and by a couple of beaten down REITS and bet on the Fed coming to the rescue. These could be 3 baggers if the bailout arrives. Obviously you play small when you place a trade like this and you sell on the news. This is highly speculative. Consider this to be a bit of a lotto ticket.

The other way to play it is to wait for news of a bailout and buy SRS on the dip after the announcement.

As for myself, I plan to buy SRS on the dip if we get a Fed bailout. I already have some at 85 so I am in no rush to buy more if I think the Fed is on its way.

My REIT lotto long bailout bet will be on GGP. Its down 22% on the negative commercial news today to around $1.40. I know they look dead, but if the Fed comes through with the bailout, this thing could easily be a double or more. This could also be a zero folks so make this trade knowing that you could lose all of it, and make it small if you pull the trigger.

I thought this was crazy at first until I asked myself this question: Why was SRS up only $2 on a day where we learned that commercial is on the brink of a meltdown? The WSJ, Bloomberg, and Deutsche Bank news should have pushed SRS up $20 today. That fact that it didn't budge tells me somethings coming. Just a hunch.

Another trade I am going to make this week is on (CHK). Its getting chilly out there folks and natural gas is down to $5 bucks. The call option here were extremely high today. The stock has pulled back to $15 from $20 recently and I like the play. I will look for some Feb. $18 calls tomorrow. I didn't get home in time to put this in.

That's it for today folks. I like to pass on my trades to you. By no means am I recommending that you should play them.

Sunday, December 21, 2008

Credit Card Debt Defaults Expected to Soar in 2009

Good Afternoon Folks

Things are pretty quiet news wise today so I will be brief. I wanted to pass along some research that I found on projected credit card debt defaults in 2009:

Final Take:

As you can see, credit card defaults are expected to soar next year. This will create a nice shorting opportunity down the road on financials who are extremely reliant on credit debt in terms of revenue.

Based on the data above, Capital One(COF), Discovery(DFS) and Amex(AXP) all look very juicy on the short side as the recession deepens because they all heavily rely on credit card revenue.

However, now is not the time to put the shorts on because you are fighting the Fed and its balance sheet. I expect many of these stocks to rise in the near term based on the hopes of a credit card bailout combined with the "bubbleheads" who believe the recession is almost over.

This will create an excellent shorting opportunity in 2009 as the credit card defaults worsen throughout the year. I will be buying PUTS on these early next year. The VIX is rapidly dropping close to levels where PUTS are worth buying again.

Some food for thought.

I hope everyone has a great Sunday!